Spring 2011(Feb-July

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Master of Business Administration - MBA Semester 3 Subject Code – MF0012 Subject Name – Taxation Management 4 Credits (Book ID: B1210) Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions. Q.1 Tax evasion is a menace to the people, economy and the country. In the wake of recent Swiss bank account scandal give your views on the following: a. How does it affect the Indian economy and the growth prospects? b. Does black money cause Inflation? [5+5 Marks] Answer: Tax evasion is sheer non-payment of tax even when it is due to be paid in the circumstances of the case. It should be remembered that while tax planning is perfectly legal, Tax Evasion is illegal and can result into penalties and prosecution for the perpetrator. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they cannot be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable offence. a. Swiss bank account scandal affects the Indian economy and the growth as follows: 1. Substantial loss of much needed public revenue, particularly a welfare state like ours. 2. Serious disturbance caused to the economy of the country by piling up of black money directly causing inflation. 3. Large hidden loss to the community by some of the best brains in the country being involved in the perpetual war waged between tax avoider and his expert team of advisers, lawyers, and accountants on one side, and the Tax adviser and his perhaps not so skilful advisers on the other side. 4. Sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.

5. Ethics (or lack of it) of transferring the burden of tax liability to the shoulders of guideless, good citizens from those of artful dodgers. As to the ethics of Taxation, the learned judge observed: We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. b. Yes, Serious disturbance caused to the economy of the country by piling up of black money directly causing inflation.

Q.2 Detail death cum retirement gratuity under Sec 17(1)iii of IT Act. Is commutation of pension a viable option in terms of tax planning? Answer:

Tax planning: If an employee is due for retirement shortly, it is better to go for commutation of pension as per the above stated rules. Because pension (uncommuted) received by all employees (govt. and non govt.) during their life time is included in the salary income and chargeable to tax.

Q.3 Explain the essential conditions to be satisfied by a firm to be assessed as firm under Section 184. Answer: Essential conditions to be satisfied by a firm to be assessed as firm (Section 184) 1. In the first assessment year: The firm will be assessed as a firm, also known as „Firm Assessed as Such‟ (FAAS) if the following conditions are satisfied: (a) Partnership is evidenced by an instrument i.e. there is a written document giving the terms of partnership. (b) The individual share of the partners is specified in that instrument. (c) Certified copy of partnership deed must be filed: A certified copy of the said instrument of partnership shall accompany the return of income in respect of the assessment year for which the assessment as a firm is first sought. Where certified copy is not filed with the return there is no provision for condonation of delay. However where the return itself is filed late then there is no problem if the certified copy is filed along with such return as the condition that it shall accompany the return of income is satisfied. Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that where uncertified Photostat copy of the instrument of partnership is submitted along with the

return of income and the certified copy is produced at the time of assessment, it will satisfy this condition. 2. In the subsequent assessment years: If the above three conditions are satisfied the firm will be assessed as such (FAAS) in the first assessment year. Once the firm is assessed as firm for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the share of the partners. Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year. Read box below for some important points to be considered in this regard. Box 1. The copy of the instrument of partnership should be certified by all partners, not being minors. 2. Where a firm had been assessed as a firm and in a later year, the salary and interest to be paid to partners has been changed in the partnership deed but the changed partnership deed is not attached along with the return of income of such assessment year, the firm will be still assessed as a firm but in such a situation, the interest and salary shall be allowed as deduction as per the earlier deed which was attached along with the return of income. Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on account of interest, salary, bonus, etc.[Section 184(5)] The firm will be assessed as a firm but shall not be eligible for any deduction on account of interest, salary and bonus etc if there is failure on the part of the firm as is mentioned in Section 144 (relating to Best Judgment Assessment) and where the firm does not comply with the three conditions mentioned under Section 184.

Q.4 List out the steps to compute total income Answer: Steps to compute total income The steps in which the total income for any assessment year is determined as follows: 1. Determine the residential status of the assessee to find out which income is to be included in the computation of his total income 2. Classify the income under each of the following five heads. Compute the income under each head after allowing deductions prescribed for each head of income: a) Income from salaries

Salary/Bonus/Commission, etc. _______ Taxable Allowance _______ Value of Taxable perquisites _______ Gross salary _______ Less: Deductions u/s 16 _______ Net taxable income from salary _______ b) Income from House Property Net annual value of house property _______ Less: Deduction under Section 24 _______ Income from house property _______ c) Profits & gains of business & profession Net profit as per P&L A/c _______ Less/Add: Adjustments required to be made to the profit as per provisions of Income tax Act _______ Net profit and gains of business & Profession _______ d) Capital gains Capital gains as computed Less: exemptions u/s 54/54B/54D etc. Income from capital gain e) Income from other sources: Gross income _______ Less: Deductions _______ Net income from other sources _______ Gross Total Income [(a)+(b)+(c)+(d)+(e)] Less: Deductions available under chapter VI A Sections 80 C to 80 U _______ Total Income _______ Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, Sections 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the gross total income so computed, the following deductions of Chapter VIA should be allowed: 80 G Donations to certain funds / charitable institutions, etc. 80GGA Certain donations for scientific research or rural development 80GGB Contribution to political parties 80 IA Profits and gains of new industrial undertakings or enterprises engaged in infrastructural development, etc. 80 IB Profits gains from certain industrial undertakings other than infrastructure development undertakings 80 IC Profits and gains of certain undertakings in certain states

80 ID Deduction in respect of profits and gains from business of hotels and convention centres in specified area. 80 IE Deduction in respect of certain undertakings in North Eastern States 80JJA Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste 80JJAA Deduction in respect of employment of new workmen 80LA Income of Offshore Banking Limit and international Financial Services Centre

Q.5 Detail the important provisions under Wealth tax Act. Answer: Important Provisions under Wealth Tax Act You should try to understand the following provisions related to wealth tax act without which would not be able to get exact implications of wealth tax act. Asset must belong to the Assessee The above six assets will be included in the net wealth of the assessee only when they belong to him. Mere possession or joint possession unaccompanied by the right to, or ownership of, property would therefore, not bring the property within the definition of net wealth for it would not be an asset belonging to the assessee. Assets must be held by the Assessee on the Valuation Date If the asset has been spent, lost, destroyed or transferred by the assessee before the valuation date, it is not held by the assessee on the valuation date. Hence the value of such asset shall not be included in the net wealth of the assessee. Assets required being included, though these may belong to others[Section 4] Individual In computing the net wealth of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held: i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or ii) by a minor child, not being a minor child suffering from any disability of the nature specified in Section 80U of the Income-tax Act, or a married daughter, of such individual, or iii) by a person or association of persons to whom such assets have been transferred by the individual directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse, or

iv) by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer, or v) by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration, or vi) by a person or association of persons to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration for the immediate or deferred benefit of the son's wife, of such individual or both, whether the assets referred to in any of the sub-clauses aforesaid are held in the form in which they were transferred or otherwise: Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958) or is not chargeable under Section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972 the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual. A partner in a firm or a member of an association of persons In the case of an assessee who is a partner in a firm or a member of an association of persons (not being a co-operative housing society), there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or association determined in the manner laid down in Schedule III : Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the firm, determined in the manner specified above, shall be included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a). An Individual being a Member of a Hindu undivided family Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computing the net wealth of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1972: a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;

b) the converted property or any part thereof shall be deemed to be assets belonging to the individual and not to the family; c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the converted property or any part thereof which is received by the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly: Provided that the property referred to in clause (b) or clause (c) shall, on being included in the net wealth of the individual, be excluded from the net wealth of the family or, as the case may be the spouse of the individual. Membership under a house building scheme [Section 4(7)] Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall, notwithstanding anything contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part, shall be included in computing the net wealth of the assessee; and, in determining the value of such building or part, the value of any outstanding installments of the amount payable under such scheme by the assessee to the society, company or association towards the cost of such building or part and the land appurtenant thereto shall, whether the amount so payable is described as such or in any other manner in such scheme, be deducted as a debt owed by him in relation to such building or part. Building/Right in building acquired in special cases [Section 4(8)] A person: a) who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); b) who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of Section 269UA of the Income-tax Act (43 of 1961), shall be deemed to be the owner of that building or part thereof and the value of such building or part shall be included in computing the net wealth of such person. Assets held by a minor child [Provisos 2 and 3 to Section 4(1)(a)] Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have been acquired by the minor child out of his income referred to in the proviso to sub-section (1A) of Section 64 of the Income-tax Act and which are held by him on the valuation date: Provided also that where the assets held by a minor child are to be included in computing the net wealth of an individual, such assets shall be included, -

(a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth (excluding the assets of the minor child so includible under this sub-section) is greater; or (b) where the marriage of his parents does not subsist, in the net wealth of that parent who maintains the minor child in the previous year as defined in Section 3 of the Income-tax Act, and where any such assets are once included in the net wealth of either parent, any such assets shall not be included in the net wealth of the other parent in any succeeding year unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.

Q.6 What is meant by Full value of consideration? How short term capital gains and long term capital gains are computed using full value of consideration? Answer: Full value of consideration The expression “full value” means the whole price without any deduction whatsoever and it cannot refer to adequacy or inadequacy of price. The consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely money or money‟s worth is m. It is not necessarily always the market value of the asset on the date of transfer. However, at many places, reference is made to Free Market Value (FMV). Expenses incurred wholly and exclusively in connection with such transfer It refer to expenses necessary for effecting transfer, e.g. brokerage, commission paid for securing a purchaser, cost of stamp, traveling expenses, incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation, etc. Short-term capital gain The profits and gains arising from the transfer of a short-term capital asset are treated as short-term capital gains and included in the total income of the taxpayer for taxation at the rates applicable to him. Where a taxpayer incurs a loss from the transfer of a short-term capital asset (such loss is termed as short-term capital loss.) the same is allowed to be set off only against gain from the transfer of another short-term or longterm capital asset. In a case where the short-term capital loss remains unabsorbed, the same is allowed to be carried forward for set off only against gain from the transfer of another short-term and long-term capital asset in the subsequent year. However, such carry forward is restricted for a period of eight years. In other words, a short-term capital loss cannot be set off against income from salaries, house property, business or profession or income under the head other sources.

2 Long-term capital gain Similarly, the profits and gains arising from the transfer of a long-term capital asset are treated as long-term capital gains. Since long-term capital gains represent accumulation of income over a period of time, these could turn out to be illusory in real terms. Accordingly, the cost of the asset is adjusted for inflation during the period of holding. The increased cost is set-off against the sale consideration of the long-term capital asset to determine the longterm capital gain. Such long-term capital gain is subjected to a concessional rate of tax to eliminate the bunching effect. Computation of capital gains Computation of Short-term Capital Gains From full value of consideration, deduct 1) Expenditure incurred wholly & in exclusively 2) Cost of acquisition 3) Cost of any improvement of asset Computation of Long-term Capital Gains From full value of consideration, deduct 1) Expenditure incurred wholly & exclusively connection with the transfer 2) Indexed cost of acquisition of asset 3) Indexed cost of any improvement of asset

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